The impact of income on public health and education expenditure: Evidence from the Indian states

Abstract

In this study, we examine the long‐run impact of state‐level per capita income on public education expenditure and public health expenditure in 17 major Indian states over the period 1993–2017. To test for the existence of a unit root, we have employed the Zivot–Andrews test and the Clemente–Montañes–Reyes test, which allows for an endogenous structural break in the data series. These tests indicate that all variables are nonstationary. Autoregressive distributed lag model with one structural break is applied to find the cointegration of variables and estimate the cointegrating equation. The bounds test reveals the presence of a long‐run relationship between public health expenditure and per capita income in 12 out of 17 states, between public education expenditure and per capita income in 15 out of 17 states. The result shows that per capita income affects the public health and education expenditure of states. We find elasticities of public health expenditure and public education expenditure vary across states and are small in magnitude (less than one for most of the states). Our results suggest that public health and education expenditures are necessary goods. Based on the results, we also draw policy implications from our findings.